Federal Reserve Chairwoman Janet Yellen said Friday the central bank could trigger some financial turbulence when it starts raising short-term interest rates from near zero, where they have been pinned for six years.
The Fed will try to limit such volatility by communicating its interest rate plans clearly, Ms Yellen said….
She’s nominally talking about the volatility arising from the Fed not being entirely clear about its market moves monetary policy strategy in order to avoid “disrupting” financial markets, but she’s really talking about volatility throughout our economy, not only the financial markets.
Democracies, especially republican democracies, are at their noisiest when they’re at their most robust. So, too, are economies at their freest and most robust when they’re at their noisiest. It is, after all, the creative destruction of a free market that creates the broadest opportunity and the broadest prosperity. It is exactly that creative destruction that is stifled by a government that sits on and suppresses market volatility.
The Economist, at least, seems worried about a deflationary cycle driven by the Euro zone falling into a fairly deep recession. The same publication seems to think that U.S. growth is mostly a mirage.
The Economist isn’t far wrong on US “Growth.” The stock markets certainly have been good for investors like me, and the markets certainly are harbingers of the coming economic environment in which us Americans must interact and get about our daily lives. But that harbinger-ness is mostly useless because the temporal connection between good times in the markets and good times in the working, functional economy is highly variable while being heavily lagged.
As an example of that, and to The Economist‘s point, even though we’ve had jobs created, unemployment reduced, deficits reduced, yada yada, under this administration, the deficits are reduced from this administration’s historic highs; unemployment is reduced from this administration’s historic high unemployment; the rate is now four years behind this administration’s promised timing if only we agreed to that spending and deficit explosion; labor force participation is at 30-year lows, and the jobs created haven’t kept up with our population growth over the same period; personal income is down over this administration’s tenure; GDP growth remains depressed compared to other post-recession periods; etc, etc, etc.
US growth is a mirage. We need the administration and the Fed to get out of the way and, to borrow a phrase, embrace the volatility.
Eric Hines